A practical guide for foreign buyers, closing costs, Mexican property taxes, and international tax treaties.
We’ve been talking about how buying real estate in Cancun, can be an excellent way to invest in a vacation home, retirement property, or rental investment. However, before purchasing a condo, house, or beachfront property in Cancun or elsewhere in Mexico, it is important to understand the taxes and closing costs involved.
One of the most common questions foreign buyers ask is:
What taxes do I have to pay when buying property in Cancun?
The answer depends on several factors, including the purchase price, the type of property, the buyer’s tax residency and whether the property will be used as a personal residence or as an investment.
This guide shoots to explain the main taxes involved in buying property in Cancun, Mexico, and the international tax treaties worth reviewing before completing a real estate transaction.
1. Real Estate Acquisition Tax (ISAI)
One of the main expenses when buying real estate in Cancun is the Real Estate Acquisition Tax, known in Spanish as “Impuesto sobre Adquisición de Inmuebles” (ISAI).
This is a local tax paid by the buyer when acquiring real estate. In Cancun, the tax is administered at the municipal level, and the applicable calculation must be verified under the rules in force at the time of closing. The tax is calculated based on the value determined under the applicable tax rules. For this reason, buyers should ask their Mexican Notary Public for an estimate of the acquisition tax before signing a Purchase and Sale Agreement or even the deed.
Good to know: ISAI is separate from the notary’s professional fees and other expenses associated with registering the property.
2. Property Registration and Notary Fees
In Mexico, real estate purchases are formalized through a public deed executed before a Mexican Notary Public “Notario Público”.
The Notary plays an important role in the transaction, including reviewing legal documents, calculating applicable taxes, preparing the deed, and coordinating its registration with the Public Registry of Property, “Registro Público de Comercio”.
Closing costs may include:
- Notary public fees.
- Public Registry of Property fees.
- Certificates and property searches.
- Appraisals and other required documentation.
- Applicable taxes and administrative charges.
- Management services.
These expenses are not all taxes. Some are professional fees or government charges.
The total cost will depend on the property value, the complexity of the transaction, and the applicable fees.
3. Annual Property Tax “Predial”
After purchasing a property in Cancun, the owner must generally pay annual property tax, known as predial. This municipal tax applies to real estate ownership and is calculated under local rules based on the property’s assessed tax value and the applicable rates. The amount may vary depending on the property’s location, characteristics, and official valuation. Even if you live abroad and use your Cancun property only for vacations, you should plan for this recurring expense. It is the Notary´s resposibility to ensure that this is paid by the seller up to the date the property is transferred. The tax is payble in bimonthly periods, although payments are ussually made on annual basis.
Important: Property tax is different from the acquisition tax paid at closing. One is an ongoing ownership obligation; the other is associated with acquiring the property.
4. Value Added Tax (VAT or IVA)
Mexico has a Value Added Tax VAT, “Impuesto al Valor Agregado, or IVA”. However, not every real estate purchase is subject to VAT.
Generally, the sale of land and qualifying residential buildings is exempt from IVA under Mexican tax law. Nevertheless, different rules may apply depending on the nature of the property and the transaction. For example, the sale of certain commercial buildings or other constructions may be subject to IVA. The tax treatment can also differ when a transaction involves land and buildings used for different purposes. Buyers should distinguish between purchasing an existing residential property from an owner and acquiring a new development or a property intended for commercial use.
Before signing, have the Notary or tax adviser confirm whether IVA applies to the specific transaction and whether any part of the purchase price must be treated separately.
What Happens When You Sell the Property?
Although income tax may not be the buyer’s main tax at the time of acquisition, it is important to consider it before investing. Mexico’s income tax is known as Impuesto sobre la Renta (ISR). When you eventually sell your property, a taxable gain may arise.
The calculation generally depends on factors such as:
- The original acquisition cost recognized for tax purposes.
- Qualifying improvements and certain deductible expenses.
- The sale price and applicable tax rules.
- The seller’s tax residency and legal status.
- The period during which the property is use for residential purposes.
- And the invoices for property-related expenses that may be deductible from this tax.
In some circumstances, Mexican law provides exemptions or other tax benefits for qualifying individuals selling their primary residence. These benefits are subject to specific requirements and should not be assumed to apply automatically to a vacation home or rental investment. For foreign residents, the rules applicable to income derived from Mexican real estate must also be reviewed.
Planning tip: Keep your purchase deed, invoices for qualifying improvements, closing statements, and other supporting documents. They may be important when calculating the tax consequences of a future sale.
6. Taxes on Rental Income From a Cancun Property.
If you plan to rent your property either short or long-term, you should consider the Mexican tax treatment of rental income. Rental income from real estate located in Mexico may be subject to Mexican income tax, even when the owner lives in another country.
The applicable rules depend on factors such as the owner’s tax residency, whether the property is rented personally or through a legal entity, and the type of rental activity. Short-term vacation rentals may also involve additional obligations, including applicable VAT, invoicing requirements, and state or municipal taxes or registration requirements. Even whether or not the property is rented furnished is a factor for this tax.
For foreign owners, it is especially important to review the distinction between ordinary residential leasing and accommodation services that may be treated differently for tax purposes.
7. What International Tax Treaties Should You Review?
For foreign buyers, understanding Mexican tax law is only part of the picture. Your country of tax residence may also impose reporting requirements or taxes on foreign investments and income.
Mexico has entered into tax treaties with numerous countries. These agreements may help determine which country can tax certain types of income and how double taxation may be relieved.
However, a tax treaty does not automatically eliminate Mexican taxes on real estate. The specific provisions of the applicable agreement must be examined.
Some examples of treaties that we recomnend reviewing are:
- Double Taxation Agreements (DTAs)
- The Mexico–United States Income Tax Treaty
- The Mexico–Canada Income Tax Treaty
- Treaties With the United Kingdom and Other Countries
- The Multilateral Instrument (MLI)
- International Tax Information Exchange Agreements
Let us know if you would like a special article on this matter as well!
8. Does a Foreign Buyer Pay Different Taxes in Cancun?
Foreign buyers should not assume that purchasing property in Mexico automatically creates a higher acquisition tax simply because they are not Mexican citizens. The acquisition tax and other closing expenses are determined under the applicable Mexican and local rules. However, foreign buyers may face additional legal and administrative considerations.
For example, we have spoked about property located in Mexico’s constitutionally restricted zone, requires a Trust (fideicomiso) or another legally permitted ownership structure when acquired by a foreign individual for residential purposes. Cancun is located within this restricted zone.
A fideicomiso may involve bank acceptance fees, setup expenses, and annual administration fees. These are additional transaction or ownership costs, not the same thing as ISAI or annual property tax.
Plan Your Cancun Real Estate Purchase With Confidence.
Buying property in Cancun can be a rewarding investment, the best approach is to review the transaction with a licensed real estata advisor in conjuntion with an experienced Notary Public before signing. Proper planning can help you understand your obligations, avoid unexpected expenses, and make a more informed decision.
This article is for informational purposes and does not intend to be legal or tax advice. Tax rates, exemptions, reporting obligations, and treaty provisions may change. The applicable rules should be confirmed with qualified professionals before completing a transaction. If you have any question or would like to check the details of a property Cancun, it would be our pleasure to help you out!
Until next time,
Gilberto Esponda
